Financial Statement Analysis

4 types of accounting adjustments

prepaid expenses, accrued expenses, unearned revenue, accounts receivable

Impact on cash flows and net income from an increase in prepaid expenses

decrease in cash flows, no impact on net income

impact on cash flows and net income from a decrease in A/R

increase in cash flows, no impact on net income

impact on cash flows and net income from a decrease in accrued expenses

decrease in cash flows, no impact on net income

impact on cash flows and net income from an increase in deferred revenue

increase in cash flows, no impact on net income

financial statement impacts of purchase of inventory on credit

current assets increase, current liabilities increase

financial statement impacts of payments for inventory purchased on credit

cash decreases, current liabilities decrease, CFs from operations decrease

financial statement impacts of sale of inventory higher than cost on credit

current assets decrease, retained earnings increase, revenue increases, expense, positive net income

financial statement impacts of an accrual of expense

current liabilities increase, R/E decrease, expense, negative net income

financial statement impacts of a prepayment of expense

current assets increase, negative cash, negative cfs from operations

financial statement impacts of collection of deferred revenue

current expense increase, cash increase, cfs from operations increase

financial statement impacts of collection of A/R

cash increase, current assets decrease, positive cash from operations

financial statement impacts of recognition of prepaid expense

decrease in current assets, negative R/E, expense, negative NI

effective tax rate

provision taxes / EBT

tax shield

pretax net non operating expenses x statutory tax rate

NOPAT

EBIT - tax provisions - tax shield

several ways a company could manipulate revenue

reduce sales allowances estimates, reduce returns estimate, overestimate percentage of completion, recognize multiple element contracts up front, backdate sales

why a company may try to manipulate revenue

meet quarterly earnings targets, meet debt maintenance covenant, exceed higher bonus thresholds

why a company should avoid revenue manipulation

illegal, wells notice, unsustainable, loss of credibility and reputation

foreign currency translation

result of adjusting functional currency of a foreign subsidiary to the parent companies reporting, reported on the OCI section of income statement and AOCI on balance sheet

foreign currency transaction

direct result of transactions booked in functional currency, recorded as operating gain/loss

cash interest

face value X coupon rate

total interest

carrying/discount value X YTM at Issue

non cash interest

total interest - cash interest

carrying value end

carrying value beginning + noncash interest

stock repurchase and retention

when a company buys back shares stock, credit cash, debit to treasury stock

stock repurchase and retirement

cash decrease, common stock decrease, APIC decrease, R/E decrease of amount paid

adjustments to cash flow from operating activities - depreciation expense

positive

adjustments to cash flow from operating activities - increase in A/R

negative

adjustments to cash flow from operating activities - decrease in deferred revenue

negative

adjustments to cash flow from operating activities - increase in A/P

positive

adjustments to cash flow from operating activities - increase in inventory

negative

adjustments to cash flow from operating activities - increase in prepaid expenses

negative

adjustments to cash flow from operating activities - stock based compensation

positive

adjustments to cash flow from operating activities - gain on asset sale

negative

adjustments to cash flow from operating activities - accreted interest expense

positive

adjustments to cash flow from operating activities - increase in wages payable

positive

adjustments to cash flows from investing activities - sale of factory equipment

positive (proceeds + G/L)

adjustments to cash flows from investing activities - purchase of marketable securities

negative

adjustments to cash flows from investing activities - sale of subsidiary

positive (net of cash sold)

adjustments to cash flows from investing activities - CAPEX

negative

adjustments to cash flows from investing activities - increase in accumulated depreciation

none adjusted in cash from operations

adjustments to cash flows from investing activities - business acquisition

negative (net of cash acquired)

Cash Conversion Cycle

average number of days to buy inventory on credit, sell inventory on credit, collect receivables, pay accounts payable

adjustment to cash flows from financing activities - dividends paid

negative

adjustment to cash flows from financing activities - issuance of bonds

positive

adjustment to cash flows from financing activities - proceeds from option exercise

positive

adjustment to cash flows from financing activities - stock based compensation

none, adjusted in cash from operations

adjustment to cash flows from financing activities - net income

none, adjusted in cash from operations

adjustment to cash flows from financing activities - stock repurchase

negative

adjustment to cash flows from financing activities - dividend

none, non cash (balance sheet)

cash received from customers

revenue - change in A/R + change in deferred revenue